Tibra tax fund anything but derivative

Trading firm Tibra Capital has launched a unique take on the tax-aware Australian equity fund as the first product for its relaunched investment management division. Tibra Investment Management has drawn on its parent’s experience in derivatives trading and riskmanagement to launch a fund – the Tibra Australian Equity Fund – it claimed can exploit a glaring inefficiency in the way equity derivatives were priced. “The pricing of stock options are determined by factors such as expected dividends, interest rates, time to expiry, the strike price and expected volatility. The market does not, however, incorporate the value of franking credits,” according to the fund’s portfolio manager, Stephen Richards, who came to the firm in January 2010 after three years as head of equity derivatives at Westpac. Backtesting had found that exploiting this mispricing could add 2-3 per cent a year on top of the post-tax ASX 200 benchmark, as long as the investor in question was a low- or no-tax payer such as a super fund or an allocated pension vehicle.

Seeded by Tibra Capital and live from January 21, Richards said the process had added 1.7 per cent to the post-tax ASX 200 as of last week. Investments into the fund would be lightly geared for a 1-1.35 times exposure to the ASX 200. It was in the management of that hedging that Tibra IM hoped to be able to add value, through derivatives mispricing but also through a tax-aware approach to corporate actions. While acknowledging that new rules were set to reduce the benefits for super funds participating in buybacks (although not tax-free pensions or charities), Richards said there were still plenty of opportunities around rights issues and placements, which the fund’s gearing would amplify.

“There is a level of optionality in the pricing of rights which is ignored when they go into the index,” Richards said. The chief executive of Tibra IM, Chris Briant, said the fund would provide a risk-managed, consistent return, significantly outperforming in ‘up’ markets and underperforming slightly in down markets. “We think for that reason this is a good complement to value managers, even though it’s a core strategy,” he said. Richards said Tibra had built systems to construct a unit trust for the fund which “removes the problem of new investors buying into unrealised gains”, and allocated the effect of redemptions to exiting investors. Importantly, the manager also sought tax advice that its strategy would not run afoul of the Australian Tax Office. “We had to be sure that the tax treatment of the derivatives would align with the tax treatment of the underlying portfolio, and both be on the capital account,” Richards said. “If the derivatives were on the income account, in some situations this process wouldn’t work, you’d lose all your franking credits for the entire year. It was important for us to ensure that wouldn’t happen.”